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Slight Drift Lower In U.S. Yields Suggests U.S. Treasuries Losing Topside

Published 04/06/2021, 12:25 AM
Updated 07/09/2023, 06:31 AM

A slight drift lower in USTs helps the big picture

A slight drift lower in UST yields following very strong March US activity data (NFP was 916k vs. 660k cons) and ISM services (63.7 vs. 59.0 cons) suggests the selloff in Treasuries is losing momentum as without inflationary spark, the US yield curve is turning less sensitive to US economic data beats. Lower UST yields in response to strong US economic data are supporting equities and USD shorts.

Softer US yields resulting in a weaker US dollar is aiding oil prices to lift off the mat today in Asia

The Reserve Bank of Australia (RBA) meeting is in focus today. The AUD faces cross-currents between a proactive central bank prepared to lean against higher yields firmly and an increasingly positive backdrop for risk-taking that is benefiting the likes of copper and US equities, two assets that historically share a positive correlation with the AUD.

My view is any weakness in the currency on the RBA’s strong commitment to controlling yields should be used as an opportunity to position for near-term upside.

Sequentially improving US economic activity should provide further upside to UST yields, medium-term. Slowing momentum upside could dominate in the near term, however. There are two potential near-term drivers for lower yields that stand out.

First, the more conservative Democratic caucuses are pushing back against the White House’s infrastructure proposal. Second, manufacturing survey data reveal supplier-delivery times at multi-year highs, pointing to increasing delays.

The big question for bond markets is whether these firms have the gumption or pricing power to raise prices at the consumer level. If they do not, in part because the labor market is still in the early stages of recovery, a pick-up in CPI inflation will prove little more than transitory. That, in turn, would slow the rise in yields.

On USDIDR Fixing

Bank Indonesia announced its intention, commencing April 5 , to i) expand the time window for the capture of USD/IDR spot transactions used in the calculation of the JISDOR and ii) implement a new publication time for the resulting rate to strengthen the rate. Bank Indonesia has changed the time for data collection to 8:00 am-4:00 pm from 8:00-9:45 am and publication time of the resultant JISDOR to 4:15 pm from about 10:00 am Jakarta time.

Notwithstanding the above changes to the JISDOR data collection and publication timings, Bank Indonesia has indicated that during the adjusted domestic FX market hours due to the COVID-19 pandemic, it will implement data collection from 9:00 am to 3:00 pm and publication at 3:15 pm Jakarta time, so impacted parties should view these temporarily adjusted hours as a bridge to the New Publication Time.

Asia stocks looked set to climb

Asian stocks looked set to climb Tuesday after U.S. equities rallied to a record on solid economic data that provided " the proof is in the pudding" of a rocket-fueled( stimulus) recovery. And helping global asset breathe much easier today, both the US dollar and Treasury yields fell. 

U.S. data continued to march in lockstep as more Americans get vaccinated against the coronavirus, restrictions are rolled back, and fiscal relief takes hold. U.S. service providers had the fastest growth on record in March as orders jumped to new highs.

Crude prices continued to wallow at the open after the UK warned that it might continue limiting foreign travel, dampening hopes for a summer travel boom. And prices are also weighted down by  Europe’s tardy reopening playbook and as looming Iranian supply dampened hopes for a swift decline in global inventories.

With Good Friday in the rear mirror, investors wasted little time to make up for lost time; oil shifts gear from super-cycle to wobbly

Markets

US equities rose to fresh record highs Monday. The S&P 500 rose a further 1.4% after breaking through 4,000 on Friday after a better-than-expected payrolls print.

Additional fuel came Monday with a record high read on the US services ISM in March. US 10-year yields were down 2bps to 1.70%. Oil was down 4.6%, with energy stocks also the only sector in the red as demand concerns still linger. 

US stocks broke higher ground on Monday after a report showed that America's services sector accelerated last month at the fastest pace on record. Suppose investors were looking for any confirmation that the US reflation trade is on full bore. In that case, they might have just received that sweet tasting "poof is in the economic pudding" as US economic data is flying.

The market just took another monumental stepping stone as both backwards-looking (Payrolls) and forward-looking (ISM) is confirming what investors have been pricing in all along up until now, a post-COVID return to economic glory.

Both historical and forward-looking strategies have their place, but when both confirm a huge economic rebound, there is only one place for stocks to go, and that is higher. Provided the data continues to support, equities and risk-on can remain at elevated levels for some time or at least until the next unexpected downside shocker hit. 

With month-end rebalancing and the Easter Holiday out of the way, while taking cast back to last Friday's US payroll, Investors wasted little time to make up for the lost time. And with the VIX shifting under 18, a more systematic type flow is back to the market.

Indeed, this was among the best quarters for stocks relative to bonds in the past 60 years.  Altogether, the data shows the economy is rolling down the runway for substantial lift-off in Q2, and make no mistake; the flightpath continues to extend thanks to the US vaccine rollouts. 

Oil Prices 

Oil prices continued to slide overnight as third and fourth wave virus outbreaks in Europe and parts of Asia, notably India, have elevated lockdown concerns that continue to hit both spot and forward demand outlooks. And at this stage of the oil market recovery, COVID-19 resurgence is walking back investors thoughts of an oil super-cycle down do a very wobbly monocycle on this bumpy road to recovery. 

After a wave of possible stop losses getting triggered below Bent 62.50, oil has found some legs on the back of robust US economic data and oil prices self-correcting nature via a weaker US dollar.  Perhaps compounding matters overnight, China continues to buy Iran oil, which is perhaps the most significant risk to rebalancing markets and pushing global inventories lower, especially as OPEC revisits their taper strategy.

In light of the COVID resurgence, markets could also be having a case of post taper indigestion with Saudi Arabia. Instead of waiting for more tangible confirmation that demand has all but fully recovered, the Kingdom will gradually return its voluntary one mbd of cuts, upping the potential return of more barrels. Overall, the alliance will boost its production by 600 kbd in May, 700 kbd in June and 841 kbd in July. When you factor in 1 or 1.5 mbd Iranian barrels and 700 kbd OPEC coming back online, you suddenly have the potential of 2.2 mbd looking for a home.  

The United States will indirectly talk about the Iran nuclear deal with diplomats from Europe, Russia, and China in Vienna this week. Although the discussion doesn't mean a sudden return to the so-called Iran nuclear deal, the US' odds of lifting the sanctions on Iranian oil exports may have risen compared to a few months ago.

Finally, and although not capturing many headlines, China's central bank has asked banks to rein in credit supply on concerns that the surge in loans may fuel asset bubbles. With the commodity markets getting long in the tooth, a softening in China credit impulse can't be suitable for the medium term viewfinder. 

Forex

The US dollar was weaker through the global risk-on channel as FX traders sold the dollar anticipating investors putting more money to work outside of the US. I don't believe there is a great deal of consensus out here other than a new quarter and green shoot of optimism abound with spring in the air. However, I still think the foremost opportunity in G10 FX markets will be positioning for European activity's likely recovery.

Vaccinations are set to accelerate significantly in April and May, and experience suggests current lockdowns will lower COVID case numbers relatively soon. Indeed, this should be positive for the euro.

The Malaysian Ringgit 

The broadly weaker US dollar should help, but significantly lower oil prices to start Q2 could cause concerns. However, more critical for the ringgit is how markets reprice expectations on the FED normalization and how US bond yields react.

With the US 10-year Treasury yield drifting lower on Monday as stocks hit record highs on the back of robust economic data, it could be a bit of an offsetting factor for the local unit.

Gold Markets

Gold was a bit stronger today due to a weaker US dollar and slightly easier US yields. Gold has formed a short-term double bottom but needs to break above $1750 before it can head higher. The metal could struggle to extend last week's recovery with the positive US NFP underpinning risk-on sentiment.  If yields start to spike again and there is a more significant reason for them to move higher rather than lower, XAU/USD could lower. While bullion found strong hands in the $1680s, the March lows, and has been relatively bullish, it is still far too early to determine that the trend has reversed higher. 

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